Increase of renting in retirement poses risks to future pensioners, new report warns

The rise in renting poses a risk to future UK pensioners, a new report has warned. 

Worrying research from The Pensions Policy Institute (PPI) predicts that if the current home ownership trends among today’s 45-64 year olds continue through to retirement, then the proportion of households that own their home in retirement could fall from 78 per cent to 63 per cent by 2041.It added that the proportion of retired households living in the private rental sector could increase from six percent to 17% during the same period.

The PPI has labelled changing home ownership patterns as a ‘fault line’ opening beneath the pensions system that could risk retirement adequacy for more than a million pensioner households by the early 2040s.

These findings were published on Thursday, last week in its report ‘Renting in Retirement – The Fault Line Below the UK Pension System’, which was released in association with Aviva.The PPI warned that few renters would have enough savings to cover both the cost of living and cost of renting in later life and estimates that 400,000 households could become dependent on income-related pensioner benefits.

Anna Brain, research associate at the PPI, said: “The research uncovers two critical implications. First, its findings quantify the concerning scale of the risks that the rise in private renting could pose to future pensioners, many of which have not featured widely in recent policy debate.

“By 2041, over one million more pensioner households could face a fall in disposable income or living standards because they had not planned to rent through retirement. Most of these people look unlikely to accumulate the level of savings they need to cover both future rent and living expenses, and the scenario suggests that up to 400,000 more households could become dependent upon Housing Benefit to afford the cost of their home.

“Second, results reveal that a series of increasingly outdated assumptions around how future pensioners work, live and save for retirement, is putting strain on the overall UK retirement income model, and on the very fabric of the UK pension system.

“The expectation that people will reach retirement with high rates of home ownership, supported by an adequate supply of social housing, is one of them.” 

A stark reminder to the pensions industry

The report marks the first time that the PPI UK Pensions Framework has been used to model the impact of a “what if” scenario on future retirement outcomes and explored the risks that falling home ownership, rising private renting and shrinking social housing sector could pose to the retirement outcomes of those nearing pensionable age.

Michele Golunska, managing director for wealth and advice at Aviva said the findings from this report serve as an important reminder to the pensions industry that to ensure savers have the comfortable retirements they are working towards.

Golunska added: “We continue to find that pension savers feel they lack sufficient knowledge and the tools required to navigate their options in the run-up to and transition into retirement. This makes it more important than ever that they are empowered to make informed decisions about how to maximise later life income. Improving our understanding of differences in financial circumstances will help the pensions industry develop better solutions for savers.” 

The number of people in retirement who are renting in the private sector is growing, partly due to the impact of government housing policies making home ownership unaffordable for a growing proportion of the UK population, according to Kate Smith, head of pensions at Aegon.

She said: “With demand for rented accommodation outstripping demand and many people competing for accommodation, private rents are rising. 

 “Many people already face a retirement income adequacy challenge, as they haven’t saved enough. The PPI report shows that very few renters in retirement will have enough income to cover their housing and living costs, with an increasing number potentially relying on State benefits to top up their income so they can afford to pay their rent. This is alarming as the UK population ages.”

She added that the report highlights outdated assumptions about homeownership, which influences pension policy. 

Smith added: “Pensions and property are inextricably linked. Much of pension policy is built on the assumption that people will have paid off their mortgage and own their own home by the time they come to retire. This in turn assumes housing costs are considerably reduced in retirement, which in turn falsely assumes people will need less retirement income to live on, prompting some to build up lower pension savings. Owning your own home in retirement not only gives financial security in later life, but also tenure security and peace of mind. 

“This trend towards lower home ownership clearly shows the need to join up pension and housing government policies, and for greater collaboration with the pension industry and housing sector.

“Increasing the supply of affordable housing, to buy or rent, could help mitigate some of the issues, but so could increasing the auto-enrolment contributions to 12%, where the employer pays a least 6%, with more flexible solutions for those on low incomes so they don’t lose out on State benefits in retirement. One solution alone isn’t likely to fix this problem.”

The property boom has nullified the actual expenses of acquiring such assets, according to Kusal Ariyawansa, chartered wealth manager at Appleton Gerrard Private Wealth Management.

He said: “Property booms throughout the past nullified the actual expenses of acquiring such assets. For example, by the time a homeowner comes to fully enjoy a debt-free property around the time of retirement, there would have been multiple transactions involving fees and stamp duty, as well as mortgage interest. It is the latter that masks the meaning.

“Throughout a 25-year term, the interest can amount to a significant amount, yet people feel they have an asset at today's net price. Property booms masked the interest, yet the future will be quite different. It is unlikely that we'll see such increases, meaning the effect of interest plays a significant role: It makes sense to rent, rather than buy, especially in London. The profession can do a lot to educate people about this reality.”